Bailout Scare-Mongering: "Another Bank Teetering on the Edge"

The quote above comes from Robert Bennett (Senate, R-Utah) and while no doubt narrowly true (presumably it’s Wachovia), implying that the bank will go under due to the failure to implement the Paulson plan is just plain dishonest. The bank has been wobbly for a very long time and t isn’t at all clear that the plan, even if it had been voted in last week, would be implemented in time to have any impact or would have done anything other than delay the inevitable.

But that isn’t the only misrepresentation Bennett made…

From CBS News:

Sen. Robert Bennett (R-Utah), a key member of the Senate Banking Committee, warned Saturday that another major U.S. bank was “teetering” on the edge of failure and would go under if the bailout deal doesn’t come through soon.

Bennett would not name the bank, perhaps learning the lesson from a situation last month when Sen. Charles Schumer (D-N.Y.), warned that California-based IndyMac could not cover its deposits, and there was a run on that bank by customers.

Bennett was essentially trying to warn the congressional holdouts on the bailout legislation that the situation was so dire that more U.S. banks would fail as soon as Monday or Tuesday, and he seemed to have knowledge, as a member of the Banking Committee, of another major financial institution in trouble.

“What will they say come Monday if another major bank fails _ I will not use the name,” Bennett said. “There’s another major bank teetering on the edge.”

Bennett has been in on some of the key negotiations on the bailout, and appears to have been briefed on some of the severe consequences if Congress fails to act on the bailout legislation.

“If everyone understands how dire the situation is, that will concentrate the mind,” Bennett said. “There will be no more commercial paper.”

The other dishonest bit is linking the bailout bill to the commercial paper market. As we noted in another post today, that market continues to be under extreme stress. Why? Because the Treasury has done zero, zip, nada to move forward on its promise to backstop money market funds.

I am not making this up. Check the Treasury website. There was an announcement with a general outline of a plan September 21, with a promise of more detail in “coming days”. Nothing further has been done. Statements of intent don’t get you very far in times like these.

The implosion in the CP market, which is truly dangerous, is completely the result of the Treasury dropping the ball. Is this a bug or a feature? If the Treasury is trying to keep panic up so it can get the bailout bill passed, that is simply heinous. But the lesser charge, that they have neglected this task by virtue of being distracted, is criminal neglect. Take your pick.

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  1. Anonymous

    They will do and say anything to get what they want. These people have about 4 months to loot the Treasury and are demanding the keys.

  2. Anonymous

    "What will they say come Monday if another major bank fails — I will not use the name," Bennett said.

    Coyness rules. So obviously the solution — to paraphrase that legendary South Seas era blind pool prospectus — is "a Treasury fund to buy distressed assets of great advantage, but no one to know what they are."

    Perhaps Senator Bennett's alarmed by a story in the Guardian, not realizing that it refers to another country:


    Spanish banking giant Santander is in high-stakes talks with the government over a last-minute rescue deal to take over Bradford and Bingley and avert a Northern Rock-style run on the bank.

    As fears mounted this weekend over the future of the former building society, savers were withdrawing funds online and a steady stream had arrived at its 337 branches across the country asking to withdraw their money.

    Sue Matthews, a 46-year-old housewife from Clifton, Bristol, was one of the many who was transferring life savings. 'I have decided to withdraw all my funds. They told me not to worry, but my savings are bigger than the amount the government promises to protect.'

    The urgency to resolve the future of B&B was heightened by concerns over Fortis, one of the largest banks in the Low Countries. Belgian and Dutch officials were fighting over the weekend to maintain confidence in Fortis after investors marked its shares down by more than 20 points on Friday.


    Blimey buggerall, what a cock-up. Since the US Treasury doesn't HAVE 700 billion dollars in the first place, the only thing which would give me confidence is seeing Weimar Ben's printing presses set up under bright lights in a glass house, and run 24 hours a day with webcams trained on them.

    When I can see the currency bales being loaded into the fleet of Goldman Sachs and JP Morgan and Citigroup trucks, I will know that we can pay our bills. At least until tomorrow.

    Dream of Zimbenwefication …

    — Juan Falcone

  3. ruetheday

    The money market mutual fund issue is a sensitive topic. These funds offer higher yields precisely because they are explicitly NOT insured by the FDIC. Additionally, account balances tend to be high, well over $100k in many cases. Extending deposit insurance without the $100k cap to funds that offer higher yields than traditional checking and savings accounts would cause depositors to flee banks for money market funds, which the Fed does not want right now.

  4. Anonymous

    I have no doubt that the Treasury is keeping the panic up to get the bill passed. Heinous yes, surprising no. I firmly believe the seizure of WAMU on a Thursday (rather than the customary Friday) was done for that very reason. WAMU, struggling for months, didn’t have enough liquidity to last one more day? And coincidentally gets seized just as the talks collapse? Sheesh.

  5. cash only


    The MMF insurance only extends to accounts opened before the MMF backstop was put in place (9/19), specifically to avoid inciting a bank run. They’re desperate and short-sighted, but not stupid.

  6. Moopheus

    Didn’t the folks investing in the money market funds understand that getting higher yields on an uninsured investment meant there was a risk they’d take a loss? Isn’t one of the rules of gambling not to gamble with money you can’t afford to lose? With all the other problems, I don’t see why we need to waste a dime to save those funds.

  7. Anonymous

    B&B was nationalized this evening and Fortis may go Monday. You can see why Paulson insisted on taking toxic crap from all comers. However, the US cannot foot a $5T bailout without destroying the economy and the currency. It's a case of picking winners and losers based on cronyism I'm afraid. Gretchen Morgenstern has an article on Goldman's exposure to AIG and why Paulson did a 180.

    Sorry to say, after that 3 pager he presented to congress I simply can't trust him…

  8. doc vinegar holiday

    I think Skilling should be set free and that anyone involved in Enron fraud should be pardoned ASAP! I also think we should start a fund to clone Ken Lay’s DNA, so that his loved ones can tap into these potential riches once Daddy is back up and running (as a fully working zombie).

    This could all be included as a rider by Bush and then Paulson can grant himself and Friends Of Angelo (Mark Foley too) SPEs or QSPEs and transfer The Loot from The Plan out of The Caymans and move it to China tax free, where they all will be cloned and rule happily ever after…

    Great job boys, heck of a great job!! Americas finest hour with the lowest rated Congress in American history! Heck of a job and now, let’s turn this country over to Palin!

  9. Anonymous

    Buy the rumor, sell the news

    If the rumor is a governmental spending plan that could keep stocks from falling,
    and the news is the approval of a bank shareholder and debt investor bailout
    where taxpayers borrow $700 billion from their children
    to fund shareholder dividends and bond interest payments
    which may have little actual immediate impact other than a few hundred Dow points
    do credit markets unfreeze on the news?
    Probably not

    Does bailing out those who caused this mess make real estate prices bottom?
    Probably not

    Do lending standards loosen?
    Probably not

    And then after Tuesday, September auto sales, earnings warnings and forecasts,
    and non-farm payrolls on Friday

    In 1929, the market crashed on October 29

    In 1987, the market crashed on October 19

    Unlike the platitudes of the pundits and politicians
    how many October 2008 corporate earnings releases
    could report falling sales and rising borrowing costs
    and predict a not so good looking holiday season?

    When does Joe Six Pack’s confidence fall off a cliff?

    How many people have told you they have already gotten out?

    If you had $100,000 to invest, what would you buy today?

  10. Matt Dubuque

    Matt Dubuque

    Bush simply stays with his top people too long. He is loyal to a fault.

    Recall how Bush stuck with the wrong generals in Iraq, such as Abizaid and Sanchez, as the situation continued to worsen. Only when Petraeus arrived did some semblance of stability arrive. (Not that it will hold, but he is obviously a far better general than his predecessors.)

    Same with Paulson and Bernanke.

    Paulson needs to get his tongue out of Goldman’s mouth and stop doing their bidding. When management of these 25 billion dollar tranches of toxic waste is outsourced, in the tradition of Emperor Cheney, Goldman will reap hundreds of millions in management fees.

    Bush needs to replace Paulson with James Baker, a friend of the Bush family who has the international respect and competence required to give us a fighting chance as a nation.

    I’m not a Republican, but Baker is the best choice for this position. Paulson has to go.

    Same with Bernanke. I have read his work for decades and he has made ENORMOUS contributions to the literature and central bankers around the world are the better for it.

    And I’m sure he’s an amazing professor at Princeton. I would have loved to have been his student.

    That doesn’t mean he can run the Fed. He’s too cereberal and disconnected.

    Bush needs to insist that Bernanke leave and be replaced with Volcker or Geithner.

    And these threats about “another bank going under” are so highly reminiscent of the decades worth of IMF ultimatums to debtor nations that have terrified legislatures and nations into passing deeply counterproductive packages.

    For a quick read on just ONE example (I could cite you 35 others in detail) check out Naomi Klein’s description of the IMF hostage negotiations re: Argentina in the 1980s in her book “Shock Doctrine: The Rise of Disaster Capitalism”

    It’s a good primer about the rise of the Chicago School and the battle against the Washington Consensus. You can pick up a copy for around 8 dollars

    Matthew Dubuque

  11. ruetheday

    cash only:

    I know that’s what Treasury said, but how on earth do you manage a deposit insurance system where only accounts opened before a certain date are covered? That just sounds like ill-conceived sillines.

  12. Chris

    What would it take to simply cut this derivatives mess off at the knees? Stop using the term insurance and substitute fee paid to ensure buyer will exist when holding term expires, and point to the similarity between the TBTF list and the CDS Swap index list. The more volume, the more fees.

    There must still be people who think it serves a purpose.

    Why should anyone waste tine organizing a regulated market for this stuff?

    Eliminating this stuff, and anything pyramided on top of it will have absolutely no effect on the ability of anyone to keep paying their mortgage, or to keep on not paying their mortgage.

    It’s been accepted since June 1982 that Citibank and the successors of Chase, Manny Hanny, Chemical (where are they when we really need them — remember “the reaction is chemical” that would be so great right now) etc become the toxic waste depositories of each wave of US credit expansion.

    Maybe we can get the casino “industry” to bury them all in a deep hole in some Nevada mountain specially designed for toxic deposits and the rest of us can pretend it all never happened. Who us? Could we have ever allowed that to happen? That’s absolutely unbelievable!

    Quite. That’s the way it always turns out to be. Whenever people turn to find out who is driving they discover there isn’t one.
    Just human history folks. Voluntary action, deliberation and choice, but no driver and turtles all the way to the bottom… aaah!

  13. jest

    the whole bank failure = great depression redux argument is in itself fear mongering, because deposits weren’t insured in the 1920’s.

    saying we need to dump toxic waste on the gov’t balance sheet to protect bank deposits is absurd.

  14. tk6910

    I am simply amazed how disconnected these so-called Congressional leaders are from the hearts and minds of the voters, let alone the truth.

    Barney Frank and key Democrats are aware that overwhelming majority of Americans are against Paulson’s plan. Yet they will vote for the plan because they know what is good for the American people. They don’t even try to persuade their constituents or communicate to them. Their tone is as arrogant as Paulson’s three page “proposal.”

    On the other hand I am impressed by the courage and honesty of people like Richard Shelby and other key Republican leaders of Congress for sticking to their principles.

    Come November lets vote out the ones who betrayed the voters. No doubt Barney Frank already has his own golden parachute lined up as a lobbyist for GoldmanSachs getting easy multimillion dollars.

  15. Anonymous

    The GOOPER whores showing ‘honesty’ and ‘courage’.

    As far as I can tell, their main objection was to the ‘equity kickers’ added by the Democrats.

    The GOOPERS have led this country to ruin but at least we have creationism taught in our schools.

  16. Darcy

    Pres Debate:
    John McCain showed a disturbing preference for highlighting the rights of war veterans.

    Maybe there is a Zimbabwe solution in the works.


  17. Knute Rife

    Why should it be any surprise that the junior senator from Utah is just as big a…um…”booster”, yeah that’s it, of the White House party line as the senior senator from Utah? Or that his grasp on the facts when engaging in such boosterism should be any more tenuous?

    As for Stein, can anyone tell me with a straight face that he hasn’t been pushing for deregulation and “free markets” for years with the rest of them? There are those of us who saw the thrift crisis coming out of Garn-St. Germaine and the current mess coming out of Gramm-Leach-Bliley, but do not number Stein with us Cassandras. And his grasp of CDSs is positively Reaganish in its masking of incomprehension as simplification.

  18. Anonymous

    The Treasury took all the teeth out of the MMF plan almost immediately because it started a run on the banks. Had they kept it in place, the same thing was about to happen in reverse — the banks flooding the markets with paper to meet withdrawals. The FDIC couldn’t carry the weight of the failures that would line up, and the Treasury has (rightfully) taken the plan down, down, down ever since. Last update I heard – which was not publicized by anyone other than the ABA – is that the plan is subject to a 90 day trial period, to be continued if successful. No major fund company is going to take the gov’t up on the offer. They’ll cut deep into their own fees with the premium, and they’ll kill one of their best tools – the bank channel. None of these firms have the capacity to run individual accounts on a retail / commercial level, nor are they going to want to meet the Patriot Act burdens of the banks even if they could gear up for small accounts.

    The commercial paper market is done one way or the other, unless they let AAAs borrow right off the Fed facility. I don’t know if any of the lawmakers have the stomach for that. If only the $50b were enough to capitalize a new, private sector bank who could pick up the slack.

  19. Yves Smith


    The Treasury has not implemented the program, merely announced that it was coming and left it hanging. Check the website. They have not provided any details, merely a sketch and a promise more was coming.

    Remember, this is a VOLUNTARY program, and participating money market funds must pay a fee of some sort. This is not something the Treasury is doing unilaterally.

    The Treasury has not provided any details of what the charges will be and how to participate and thus no money funds appear to have signed up.

    This is confirmed by readers who have called their money fund and have been told that they are waiting for details of what the program will be.

  20. Francois

    If so many Congresspeople insist on this plan (while others oppose it for reasons that are not entirely, hmmm, facts-based?), despite a tremendous opposition from the voters at 40 days from elections, the question becomes:

    Cui bono? What’s in it for them?

  21. Richard Kline

    “Is this a bug or a feature? If the Treasury is trying to keep panic up so it can get the bailout bill passed, that is simply heinous.”

    Feature. Paulson and the kleptocrats are not above holding the country hostage to get what they want. Oh, I suspect that they really believe that their choice is the best one. But there is more than an odour of blackmail in how this ‘crisis’ of the last two weeks has proceeded. The bondmarkets know that they will face a Democratic Congress and Administration, and even after Election night they will be cut off fromt he kind of steal they are trying to bullrush through now, so if they are going to siphon off public funds to make good their bets they have five weeks—but really once Congress adjourns that’s it. This entire process is odious, only matched by the total failure of national political leadership of all stripes.

  22. Richard Kline

    Yo Matt, I should let this pass, but I can’t re: Petraeus in your simile. Now, I won’t dispute that he is a competent military commander and better than those he replace; having studied many, I think that this is a true statement. But the changes in Iraq had _NOTHING_ to do with his abilities, and hence do not correlate with his capacities. This is a long analysis not really fitting for this context, so I won’t go over that contention now. But Petraeus and his three myriads had really nothing to do with the changes in the insurgency, and I mean that advisedly; in fact, he was taken by surprise by those changes, and they had begun before he was appointed.

    I say this because the analogies which will be drawn from our Iraq experience will have major implications for the next major foreign wars we insert ourselves into, and more are coming, in the mid-term if not in the next Administration. And the ‘Petraeus succeeded, and because he was better’ meme will do us a world of damage in due course, despite it’s substantive inaccuracy. I will be arguing this for years, but our getting this wrong now—and the country _has_ gotten it wrong, and so will remember it wrongly—will have deep costs down the road.

  23. RK

    Earth to Senator Bennett! Earth to Senator Bennett!!
    Treasury Bills are COMMERCIAL PAPER. It’s just that
    the enterprise only posts a profit (surplus) once every
    10 years.

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